The Market Today
Busy Week of Economic News and Central Bank Decisions
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Very Busy Week for the Economic Data: This week brings a flurry of economic reports and central bank decisions. We will see reports covering PCE inflation (Tue), personal income and spending (Tue), the 2Q Employee Cost Index (Tue), ADP’s July private payroll growth estimate (Wed), construction spending (Wed), manufacturing activity (Wed), auto sales (Wed), the June trade balance (Fri), and the July jobs reports (Fri). The July jobs data is likely to be the focus with expectations for another strong month. However, any indication of accelerating inflation or wage gains could roil the markets and there are plenty of opportunities for that this week. Tuesday’s PCE inflation report, 2Q Employee Cost Index, and Friday’s Average Hourly Earnings number are all capable of doing so.
Bank of Japan and Federal Reserve Policy Decisions: On top of the loaded calendar, the Bank of Japan meets Tuesday and there is much speculation that the central bank could adjust their current policy stance which included an excess reserve target of -0.10% and a 10-year JGB peg at 0.00%. The speculation has helped push sovereign yields higher over the past week. The FOMC is also scheduled to announce its most recent policy decision on Wednesday. We do not expect a rate increase and will be focused on any changes to the Committee’s confidence level in inflation.
Overnight – Sovereign Yields Start Busy Week Higher as Investors Eye First BoJ’s Tuesday Decision: Sovereign bond yields pushed higher overnight steepening most major curves between the 2-year and 10-year maturities. Central bank decisions will play a crucial role in what is scheduled to be a busy week for global investors. While yields on Japanese government bonds did little overnight, longer maturities remain near their highest levels since the Bank of Japan adopted its current yield curve control policy in September 2016. There has been growing speculation that the central bank could modify that policy, which pegs the 10-year yield at 0.00%, to take some unintended strain off bank lending. In addition to higher domestic yields, that decision would have more wide-reaching implications for global yields outside of Japan. U.K. Gilt yields have moved up the most on Monday, with the 10-year yield 4.9 bps higher before the Bank of England’s Thursday meeting. German yields rose after stronger state inflation readings, with the 10-year yield up 3.4 bps to 0.43%, the highest in six weeks. The Treasury curve was higher and steeper with the 2-year yield up 0.8 bps at 2.68% and the 10-year yield up 2.6 bps to 2.98%. Global stocks are generally weaker, with rate-sensitive sectors weighing the most on the Stoxx Europe 600. Technology was its third worst performing sector following a poor earnings-related performance by U.S. companies on Friday. Early U.S. futures are mixed and signaling little reprieve for the Nasdaq, down 0.3% earlier.
ICYMI – July 27, 2018 Weekly Market Recap: Yields finished higher last week after 2Q growth was reported at 4.1%. But it was developments related to global monetary and trade policies that drove most of the move. The U.S. economy experienced its strongest quarter for economic growth in almost four years (3Q14) last quarter. Consumers rebounded sharply (+4.0%) from a 1Q slowdown and businesses continued to invest in structures (+13.3%), equipment (+3.9%), and intellectual property (+8.2%). Government spending picked up (+2.1%) and trade had an outsized impact as growth in exports (+9.3%) dwarfed a more modest gain for imports (+0.5%). Third quarter growth expectations also benefitted from the data, as a second quarter contraction in inventories (-$28B annualized) gave companies more room on the shelves for restocking. But it was monetary policy (Monday) and trade developments (Wednesday) that had the biggest upward impact. Reports indicated that the Bank of Japan was discussing potential tweaks to its policy control of the yield curve and the U.S. shook hands with the EU on an agreement to work towards a zero-tariff trade policy. Click here to view the full recap.